Top pay ratios: the latest step towards pay transparency

We look at measures announced over the summer which will require listed companies and higher education institutions to publish pay ratios for their organisation’s top earner.

Overview

The introduction of pay ratio reporting should be seen in the context of a number of recent initiatives to require greater pay transparency in a wider range of organisations. Gender pay reporting provides the most obvious example. But there have also been significant steps taken over the past few years, particularly for organisations which receive public money or charitable donations, to impose greater openness with regard to the remuneration of higher paid staff.

Chief executives’ pay ratios: listed companies

Under regulations which were made in July 2018, listed companies with more than 250 UK group staff will be required to include pay ratio data in their directors’ remuneration report. This will be in the form of a pay ratios table, which will compare the total remuneration of their chief executive officer with the total pay received by an employee sitting on the 25th, median and 75th pay percentile. They have a choice of methods by which to compile these figures, one of which is to use the data compiled for gender pay reporting as a starting point. Looking further ahead, they will also need to explain any annual changes to the ratio and report on trends in the median percentile.

There is already a fair amount of information published about CEO pay and how it compares with staff generally, particularly in relation to the FTSE100. However, these requirements will apply to a wider range of companies and provide a more precise measure. If the experience of gender pay reporting is anything to go by, they will lead to a higher degree of public scrutiny about executive pay.

Companies still have plenty of time to prepare, since the new requirements will only apply to accounts for financial years starting on or after 1 January 2019. That means that it will be 2020 before the first data are published, though companies are being encouraged to produce the data earlier on a voluntary basis.

Vice chancellors’ pay ratios: higher education institutions

The Office for Students published a new accounts direction in June 2018, which will apply to accounts for the years to July 2018 and July 2019. The new salary ratio requirements are slightly less extensive than those that will apply to listed companies, but will kick in sooner – from December 2018, which is the deadline for the publication of the 2018 accounts.

In the HE sector two ratios are required in relation to the “Head of Institution”; one for basic pay and one for total remuneration. In each case the required point of comparison is with the equivalent median measure for all staff.

The CUC Senior Staff Remuneration Code (also published in June) requires that the ratios should be accompanied by “sufficient explanation and context to enable useful comparison”. It also suggests that other figures could be published - for example the ratio of the HoI’s salary to median professorial, academic or professional staff’s salaries. It states that over 80 per cent of higher education institutions currently sit in the range 4.5 to 8.5 and that if they wish to position themselves outside this range they will need to be prepared to justify to stakeholders and the regulator why this is desirable.

Other pay transparency measures

Pay ratio measures, which seek to create transparency around pay equality in what is currently a relatively small number of organisations, are paired with obligations to show a breakdown of the pay of their highest paid staff in salary bands in their statutory accounts. These requirements need to be seen the context of more broadly- based pay transparency measures.

Gender pay reporting: The first reporting year ended in late March/early April 2018. The Government has recently announced that all organisations subject to these requirements have now reported. There has been considerable public support for these requirements, despite criticisms from a number of quarters. Recently the BEIS select committee has recommended that the minimum staff threshold for gender pay reporting obligations should be reduced from 250 to 50.

Top pay in the public sector: The Government introduced a number of additional requirements after the 2015 general election, including a commitment to publish the salaries of all senior officials earning £150,000 or more. Similar requirements apply to local authorities.

The BBC: When the BBC’s charter was renewed in 2016, it included a requirement to publish the pay of all staff paid more than £150,00 from licence fee revenue in salary bands. That led to a great deal of publicity when the first figures were published in 2017 and revealed that the majority of the highest earners were men.

Charities: New pay disclosure requirements are included in the Charity Commission’s 2018 annual return for charities. Charities submitting an annual return are now required to say whether any of their staff receive total employment benefits of £60,000 or more. Any charity that answers this question in the affirmative is then required to confirm how many staff fall within a number of income bands set by the Commission, starting at £60,000. The equivalent threshold for HE institutions (which are exempt charities and so separately regulated) is currently £100,000.

Conclusions

While some pay transparency requirements have been in place for many years, current Government policy is in favour of greater transparency. The new pay ratio requirements are part of a package of corporate governance reforms which seek to make organisations more responsive to the interests of all stakeholders.

Organisations that are not affected by these latest changes should nonetheless be prepared for further measures to reach them in the future. Some may even decide to publish some data on a voluntary basis.

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